25 April 2012

Over the last few months you'd have been hard-pressed to miss the ongoing discussion about whether the rate of Newstart allowance is too low. Occasionally those discussions have also referred to the rates of youth allowance and Austudy payment. I'm going to have a bit of a look at Austudy in this post, mainly because it's about to get a new income test that seems to be a bit...unusual. Broken, even. But there's still a link in this to the rate of payment issue, which I'll get to at the end.

First up a background note: with some minor exceptions, the rate of Austudy is lower than Newstart (NSA). Perhaps to make up for that handicap, Austudy recipients can have more income than NSA recipients before they start to have their payment reduced. At the moment Austudy recipients have an income test free amount of $236 a fortnight, compared to $62 for NSA. Under the new income test, this amount will increase to $400 from 1 July, and, unusually for this type of payment, the income test free amount will be indexed each year.

This new arrangement has the potential to make Austudy recipients who earn while studying considerably better off financially than their NSA counterparts. The message in the design (assuming there is one) seems to be that Austudy recipients should work while studying.

Unfortunately, when it comes to couples where one or both is an Austudy recipient this income test arrangement only half works. It's a bit hard to explain so I'll show you instead with some charts.

First off, lets look at a couple where one partner is an Austudy recipient and the other gets NSA. We'll assume the NSA recipient is the one who gets work and the Austudy recipient is ...studying.

Chart 1: NSA & Austudy couple - disposable income

Note:CEA refers to the Clean Energy Advance; DI is Disposable Income

You'll notice that the NSA rate decreases as private income increases. Once NSA has disappeared altogether Austudy starts to reduce. This reflects a type of income test where the reductions in a couple's payments are done in a specific sequence - first the earner's payment is reduced, then the partner. Perhaps a little unimaginatively, this is called a sequential income test.

A key element of sequential testing is that a person's payment is not reduced by partner income until that partner has first exhausted their own entitlement. In other words, only income that exceeds the partner's income test cutout amount is taken into account. At least, that's the theory.

There is a bit of a logical problem here though, which we can see if we consider our couple above at the point where they first claim payments from Centrelink. Imagine that Partner 1 (who we'll call Randolph) is already working, earning $25,000 a year, and Partner 2 (Angela) is studying and wants to claim Austudy. Looking at Chart 1, we can see Randolph obviously earns to much to get any NSA, so how do we work out how much of his income should reduce Angela's payment? The answer is that we assume that a person who isn't on a payment would have had NSA if their income wasn't so high, and so we use the NSA income test cutout even if they have never applied for it.

So far, so good. The transition from reducing one partner's payment to the next is smooth.

Next, lets look at two Austudy recipients. Here's their version of Chart 1, cunningly called Chart 2.

Chart 2: Austudy & Austudy couple - disposable income

What new devilry is this? There's a sudden and substantial fall in income at the point where Randolph, who is working and studying, exits payment due to income. This happens because from that income point upwards, Randolph is not an Austudy recipient. And what's the rule for working out how much income should be taken into account for Angela? Treat Randolph as if he would have been eligible for NSA. The generosity of the new Austudy test is lost when Randolph exits payment, despite Angela being an Austudy recipient.

Here are the disposable income results from charts 1 and 2 together:

Chart 3: disposable incomes compared

Here you can see that the new test does improve the couple's disposable income compared to the NSA-Austudy result, but falls in a heap at about $27,000. In this example, Randolph and Angela are better off financially if he keeps his income below the cutout. If he exceeds it, he needs to earn over $40,000 a year just to get the couple back to where it was. That's an income range of over $13,000 a year in which the household can be worse off having an increase in income which takes Randolph off Austudy.

The sequential income test, as currently implemented, is only half built. By falling back to NSA income test cutouts as the "default" position it denies couples the benefit of measures like the income test changes for Austudy.

This is not a criticism of the July change per-se. The couple problem in sequential income testing has existed since the scheme was introduced in 1995. However, the substantial increase in the individual income test free area will exacerbate the problem, and indexation will just make it worse.

So, is there some way this links back to my opening claim that this is tied up with NSA rates? Well, if the NSA rate is increased then, barring some offsetting change elsewhere, the income test cutout for NSA will increase too. And that means less income will be counted for cases like Angela's when Randolph goes from being an actual Austudy recipient to a person with a notional NSA cutout.

So, even those not on NSA might benefit from an increase in its rate, especially if they are called Angela.

Addendum

When I wrote this post almost 11 months ago now, I was fully expecting that there would be an increase in the partner income free area for Newstart allowance as a result of the implementation of the clean energy supplement. Perhaps I was channelling a fortune teller though; for some reason I put in the words "...barring some offsetting change elsewhere...". Well, it seems there has been an offsetting change which means the increase won't occur. It's outlined in this post.